On the heels of a House subcommittee investigation on the
supermarket industry (previously discussed on this blog) Whole Foods has
announced the acquisition of competitor Wild Oats. I don’t foresee any significant antitrust
problems in this merger. The two firms
do not have a significant overlap in local geographic markets and even where they do, I
suspect that the product market definition used to review the deal will be broader than
"high end supermarkets that provide free samples and overcharge you on products
readily available elsewhere" (hence the nickname “Whole Paycheck” for Whole
Foods). This is a defensive move for
Whole Foods, which is seeing its profitability erode as other players enter the
higher end of the grocery market.

In light of the Congressional investigation by Congressman
Kucinich, my own analysis on the supermarket industry is that it has become
transformed in the last decade or so through increased consolidation and
competition by retailers outside of traditional grocery stores. During this period, WalMart has become the
largest supermarket in the United States. The United States has witnessed the rise of club stores
(Sam’s Club, BJs, Costco), Dollar stores, and high end groceries (Whole Foods,
Trader Joes). Traditional supermarkets
are under attack from both value and premium stores. Increasingly, it seems as if the premium
stores such as Whole Foods are under attack by everyone else, as other stores
focus on higher end shoppers willing to pay higher premiums.

The Whole Foods/Wild Oats merger is not a long term fix for
Whole Foods. The Wild Oats stores tend
to be smaller than Whole Foods stores and many will need to be expanded and/or
upgraded. In the short term, this may
placate shareholders seeking greater revenues. However, Whole Foods needs to come up with a new strategy to address a
highly competitive supermarket industry.